How to Invest Small Amounts of Money

My advice to anyone investing a significant amount of money – say, more than $50,000 – is twofold. If you want to be hands-on, buy a rental property. If you want to be hands-off, put it into index funds directly through Vanguard.

Unfortunately, that “tens or hundreds of thousands of dollars to invest” scenario is a dream to most of us. Many people find themselves digging out of debt (or, luckily, never in debt), but without a whole lot of money to squeeze out of their monthly pay. How does a person invest $50 a month? What about a lump sum of $200 or $500? What do you do with that kind of money?

First of all, it’s a bad idea to take that small amount to a brokerage. Why? Most brokerages charge a fee to buy into an investment and then charge a fee to sell that investment.

Let’s say your brokerage charges $10 for a buy and $10 for a sell. If you have $200 to invest, the fees for buying and selling alone eat 10% of your money. Even if you have $500, that’s 4% of your money gone immediately. It will take months or years to get back to the break-even point on that money, let alone earn a return, and most of the things you would invest in there carry enough risk that it ends up not being worth it for small amounts.

There are some companies – like Vanguard – that allow you to invest directly through them, but their investments usually have a very high minimum investment. In Vanguard’s case, virtually all of their investments have a $3,000 minimum, and their lowest-fee tier of investments usually start at a $10,000 minimum investment. In other words, these things are outside the bounds of what really works with a small amount.

So, what are some smart ways to invest a small amount – say, less than $1,000?

Build an emergency fund. If you don’t already have $1,000 or so socked away in a savings account to take care of major emergencies, then you need to build that up right away. Period.

An emergency fund is pretty much just like it sounds: it’s money stowed away in savings that you forget about unless there’s an emergency in your life that you can’t handle. At that point, you can tap the emergency fund to handle the problem without going further into debt.

Our emergency fund helped us several times early on in our financial turnaround (due to child-related emergencies, mostly) and we still tap it on occasion when something unexpected happens that could really stretch our budget. It’s been an incredibly valuable tool that has kept debt at bay.

Some people like to use a credit card for their emergency fund, but a credit card doesn’t help if it’s maxed out or if you’re dealing with an identity theft problem. Cash is king, and an emergency fund in your savings account down at the bank is an essential thing to have.

Pay down a debt. If you have an outstanding debt, using that small amount to make an extra payment on that debt amounts to investing that money very wisely. In essence, your investment provides a return equal to the interest rate on that debt – and it’s a tax-free return.

What do I mean by that? Let’s say you owe $1,000 at 20% on a credit card. That means you’d be paying $200 a year in interest. You take $200 and make an extra payment on that debt, leaving you with an $800 balance. $800 at 20% is only $160 a month in interest. In other words, your $200 investment is saving you $40 a year in interest, keeping that money in your pocket instead of going to the credit card company.

Early in our financial recovery, we used several small windfalls to directly tackle our debt problem. This meant smaller interest payments, which meant more of our subsequent payments went toward the balance instead of merely toward interest. This caused our debts to vanish much faster.

Assuming you have a small emergency fund already but you’re still facing outstanding credit card debt, this is a great way to invest your money.

Make some energy efficiency improvements in your home. Energy improvements in your home cause a permanent reduction in your energy bill, which will return that investment to you over time and eventually return even more. For example, if you invest $500 in energy efficiency improvements in your home and it cuts your monthly energy bill by $20 a month, you’ll break even in 25 months and then have $20 a month more in your pocket every single month thereafter.

There are a lot of things you can do with a small investment in energy improvement. You could air seal your home or install energy-efficient light bulbs everywhere. You could install a programmable thermostat. You might even get an energy-efficient window or two installed.

In our home, you’ll find a lot of LED light bulbs, a programmable thermostat, a largely draft-free living space, some energy-efficient appliances, and some energy-efficient windows, too. These things help keep our energy bills quite low so that we’re never overwhelmed or surprised when a bill comes in the winter or the summer.

All of these improvements will pay for themselves through lower energy costs, reduced maintenance or replacement costs, and/or an increase in home value.

Put it aside for a big upcoming expense. Perhaps you know that you’re going to be paying for a wedding soon, or that you’re going to have to travel to South Carolina for your sister’s graduation. Maybe you’re thinking about replacing a major appliance in the near future or need a car down payment.

Big expenses like these are simply a part of life. All of us have big expenses – travel, a home, a car, a wedding, a medical bill. Having money set aside for those expenses when we see them coming up is powerful.

In 2014, we took a rather expensive family vacation in which we were able to take my parents to see the ocean for the first time in their lives. We saved up for it, using many little windfalls along the way. Saving ahead made the trip so much easier.

If you can see that big expense coming down the road, take that money and put it aside for that upcoming bill. That way, you’re much less likely to go into debt for that big bill, which will save you quite a bit of money in interest payments. It also means less stress.

Get a career certification. You could take your small windfall and use it to invest in a career-related certification that could boost your professional opportunities.

Almost every professional field has a number of useful certifications that can boost your current job and open doors to new jobs in your field that may offer higher salary or other useful benefits.

I know that both of my previous career paths offered tons of certification options and, just before I switched careers, I actually started training for two different certifications. Had I stayed in that career path, such training would have been invaluable.

Spend some time doing some research about what kinds of certifications are available in your field and which ones are actually useful and desired by employers, then invest your money in improving your career.

Splurge thoughtfully. Sure, it’s tempting to splurge when you suddenly find yourself with a little bit of cash. The problem is that splurges often end up being very short-term. You do something that’s fun at the moment, but there’s no lasting joy from it.

Splurges that provide lasting joy are splurges that are actually worth it. So, if you want to spend your money on something fun, give it some thought first. Don’t just run out to the nearest store to buy something. Think about it for a while.

Over and over again, I’ve found that the highly impulsive splurges are almost always completely forgotten within a day or two. They never stick around to make my life happier or more fun over the long haul. Instead, it’s the more thoughtful splurges that actually make a lasting difference.

What can you spend that money on that will give you (and perhaps others in your life) the most lasting joy? It really depends on you and your life, but if you spend some time – say, a month – thinking about that question and turning over the wide variety of possibilities, you are much more likely to make a great choice with your money. Be patient, in other words.

Here’s the real moral of the story: be thoughtful about your little windfalls. Spend some time thinking about what you can do with that money that will make a real difference in your life. Maybe it’s having some emergency money, or maybe it’s just cutting bills for the foreseeable future. Whatever it is, take the time to make the smart choice. You’ll be glad you did.

Trent Hamm

Founder & Columnist

Trent Hamm founded The Simple Dollar in 2006 and still writes a daily column on personal finance. He’s the author of three books published by Simon & Schuster and Financial Times Press, has contributed to Business Insider, US News & World Report, Yahoo Finance, and Lifehacker, and his financial advice has been featured in The New York Times, TIME, Forbes, The Guardian, and elsewhere.